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Temptation and Self-Control: Some Evidence from the Consumer Expenditure Survey

  • Kevin X.D. Huang

    ()

    (Research Federal Reserve Bank of Philadelphia)

  • Zheng Liu

This paper empirically estimates a balanced-growth consistent, dynamic, structural model of intertemporal consumption and asset pricing that allows for, but does not assume, the Gul-Pesendorfer preferences of temptation and self-control, using synthetic panel data constructed from the Consumer Expenditure Survey. One novelty of our model is that the cross-sectional distribution of wealth-consumption ratio is a potentially important determinant for the implied pricing kernel, additional to the cross-sectional distribution of consumption growth, while the importance of this additional factor depends on the strength of temptation and self-control. The estimates that we obtain provide evidence supporting the existence of temptation and self-control in preferences. With reasonable precision, we estimate a significant present-biased temptation strength, and we reject the null hypothesis of no temptation at common confidence levels. We explore the quantitative implications of the self-control problems for equity premium, risk-free rate, and asset price volatility.

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File URL: http://repec.org/sed2005/up.20147.1107203418.pdf
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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 770.

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Date of creation: 2005
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Handle: RePEc:red:sed005:770
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